The limited literature on bundled episode payment for physicians and hospitals suggests that bundled payments are effective in slowing the health care spending growth;incentivizing providers and payers to create or join organized networks;reducing complications, readmissions, and waste;and increasing provider accountability for outcomes. The proposed demonstration project will evaluate the comparative clinical and economic effectiveness of episode payment for physicians and hospitals relative to current payment methods in California. The project complements the CMS Acute Care Episode (ACE) demonstration project by selecting some of the same procedures while focusing on commercially insured and Medicaid and Medicare Advantage HMO populations. The project expands a current California payment pilot for two orthopedic procedures in the under-65 commercial population that includes eight hospitals, one physician Independent Practice Association (IPA) and four health plans in Southern California. By the end of the grant period, the demonstration project will include ten clinical areas, 20 hospitals and their affiliated physicians, and additional patient populations. As the initiative spreads across California healthcare markets, diverse delivery systems, patient populations, and clinical areas, valuable experience will be gained regarding which designs and approaches are most effective;what administrative, regulatory and delivery system structures pose barriers to implementation;and the requirements for scaling bundled payment approaches nationally. A rigorous evaluation of the impact of bundled episode payment on both clinical quality and health care costs in comparison to current payment mechanisms will combine quantitative and qualitative methods to describe and evaluate the evolution of the demonstration project and its impacts on care quality and costs. Qualitative data from case studies will describe organizational response to the new payment methods, including new methods of care coordination and financial gainsharing with physicians. Quantitative hospital data will be used to assess the impact of the new payment method on the total surgical cost of care, revenues and contribution margins, the cost of the implantable devices used, hospital length of stay, and in- hospital complications. Health plan data on physician, hospital, pharmaceutical, and ancillary claims will be used to assess the impact of the payment changes on quality of care indicators such as infection, dislocation, and readmission. PUBLIC HEALTH RELEVANCE: The proposed project addresses an IOM research priority-strategies and interventions for improving care by redesigning payment-by proposing a real-world demonstration of bundled episode payment for several IOM priority conditions, including arthritis and non-traumatic joint disorders and cardiovascular disease. Results of the demonstration in terms of both clinical quality and costs will be rigorously evaluated in comparison to current payment mechanisms. Expansion of a current pilot in Los Angeles and Orange Counties to patient populations and delivery systems across the State of California will provide valuable information on the scalability of bundled episode payments in commercial populations that may be generalized to national efforts to implement payment reform.